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Details of the draft report
This draft report does not contain any fndings or recommendations about
the competitiveness or effciency of the superannuation system at present.
Instead, it proposes a comprehensive framework that can be used to
assess the system’s effciency and competitiveness at a future time (under
stage three of the Commission's work). The framework comprises system-
level objectives, along with assessment criteria and a suite of performance
indicators.
The system-level objectives for superannuation identifed by the
Commission are specifc to competition and effciency and revolve around
the best interests of members. The proposed assessment approach relies
heavily on benchmarking, and will use a large number of indicators to
facilitate collective assessment, along with evidence based interpretation and
judgment. This will include input and process indicators, output indicators,
behavioural indicators and outcome indicators. Some indicators will be
quantitative while others will be qualitative.
For contestability, or the competitiveness of the system, the Productivity
Commission has proposed a single broad objective: a level of competition
that drives effcient outcomes for members. For measurement of the
effciency of the system, four system-level objectives have been proposed:
1. maximising net returns on members' contributions and balances over
the long term
2. meeting members' preferences and needs, in relation to information,
products and risk management, over members' lifetimes
3. proving insurance that meets members' needs at the least cost
4. complementing a stable fnancial system, and not impeding long-term
improvements in effciency.
The Commission has proposed 13 criteria to assess the contestability of
the market, with 56 identifed ‘indicators’ for these criteria. The key areas
of focus include barriers to entry and exit (focusing on default and vertical/
horizontal integration), costs and whether there has been a decline over time.
The Commission indicates that competition is about the best interests of the
member, is not an end in itself and will be assessed in terms of the benefts it
can deliver for members.
The Commission has proposed 14 criteria that span all three aspects of
‘effciency’: operational, allocative and dynamic. The criteria will also cover
the three phases of superannuation: accumulation, transition and retirement.
Fifty nine indicators have been identifed for the effciency criteria.
In terms of effciency, the Commission considers that maximising net
returns (after fees and taxes) is the most important way in which the
superannuation system contributes to adequate and sustainable retirement
incomes. A related criteria is whether the system minimises costs and fees
since, all else being equal, higher fees and costs will reduce net returns. The
Commission identifed the challenges of measuring allocative (economy-wide)
effciency and the trade-off between short-run operational effciency and
long-run dynamic effciency.
Signifcantly, the draft report notes that while the cost of insurance held
through superannuation detracts from retirement balances--and, ultimately
retirement incomes--policy dictates that life and total and permanent disability
insurance are bundled with default superannuation on an opt out basis.
Given this constraint, the Commission intends to assess whether trustees are
offering the most appropriate insurance for their members, and whether the
costs of insurance are minimised for the type and level of cover provided.
Establishing the system's performance against these objectives and criteria
will require the consideration of a great deal of data, some of which is not
currently available. Identifed data gaps include net returns by asset class,
historic data on fees, indirect investment costs, costs/fees associated with
outsourcing, height of barriers to entry, and the extent of duplicate and
Superfunds September 2016